There’s no getting around the fact that cars are expensive. If you don’t want to wait until you have saved up enough money to pay for a car in cash, it can be tempting to use credit instead.
You have probably heard about auto loan financing, but can you buy a car with a credit card? Technically, the answer is yes, you can.
However, whether your lender will allow you to do so is a whole other question. Plus, the amount of credit you can put towards a car and what your financial limit is will vary. That said, there are several reasons why buying a car with a credit card may be a bad idea.
Will car dealers let you use a credit card?
Whether or not a dealer will let you pay for a car with a credit card depends on each dealer. Essentially, it will be a case-by-case basis.
For instance, some dealers will not allow buyers to use credit cards, no matter the circ*mstances, whereas other dealers will accept credit, though they will limit the amount of money you can charge to your card. On the other hand, some dealers might even accept car payments paid with credit cards in full.
These various outcomes are often due to different credit card processing fees, which typically range from 1% to 3.5% of the total transaction value. On larger transactions, processing fees add up quickly. For example, 4% of a vehicle that costs $40,000 is $1,200.
That is a large sum of money, which can be a major drawback for certain dealers. However, dealers who are facing higher profit margins might swipe your credit card without any problems. Alternatively, they might have a policy that states their customers are responsible for paying any and all processing fees instead.
How much of a car purchase can you put on a credit card?
Some dealers will let you buy a car with a credit card outright. However, that is a rare outcome, even amongst dealers who accept credit cards.
Generally speaking, dealers will limit the value of credit card transactions by only accepting payments between $5,000 and $10,000. That may be enough for you to buy a used vehicle outright, but for newer vehicles, it’s more likely those values will only cover your down payment.
Setting these limits lets dealers minimize the impact of credit card processing fees. Doing so can also protect buyers from becoming overextended if they also opt for auto financing.
What to consider before financing a car with a credit card
Using a credit card to buy a car can be tempting, especially because it can put you in the driver’s seat faster. However, it’s not a financial decision you want to make on a whim.
Your credit limit
First of all, you will need to consider your credit limit, which is the maximum amount of credit that your credit card issuer will lend you for credit card purchases. If your credit limit is too low, you can’t pay for a car with your credit card. Even if you have a high limit, using more than 30% of your credit limit can tank your credit score, so be mindful of your usage.
High interest rates
Auto loans are secured loans, which means that the dealer has some recourse if you can’t pay your bill. In other words, dealers have the potential to repossess the car if you do not follow through on your end of the deal.
On the other hand, credit cards deal with unsecured debts, meaning if you don’t pay your bill on time or at all, collecting what is owed becomes much harder. To compensate for this increased risk, credit card companies typically charge much higher interest rates than the interest rates associated with auto loans.
In fact, credit card interest rates are often 15% to 20% higher than interest rates on auto loans. But over the past two years, auto loan rates have averaged about 4% to 9%, with the exact rate dependent upon the borrower, the lender and whether the car is new or used.
In other words, using a credit card to buy a car could cost you two to five times more in interest than if you were to opt for financing options. There is one exception, which is if you have a credit card with a 0% intro APR offer. However, failing to repay the balance before the introductory period ends means you’ll have to pay higher interest on the remaining balance overall.
You could hurt your credit score
Buying a car with a credit card can be worth it, but this is usually the case in rare situations. However, if you don’t have the cash to pay off your bill before the billing cycle ends, you could exceed a credit utilization rate of 30% and that can hurt your credit score immensely. Also, if you fall behind financially, a single late or missed payment can tank your score for years.
Potential for rewards
If you have a cashback or rewards credit card, a large purchase, such as a car, could make using your card worthwhile. But most credit cards are unlikely to extend rewards that meet, let alone exceed, your interest rate if you don’t pay your statement off immediately.
For instance, 2% cashback on a $10,000 credit card purchase is only $200. Again, the exception is in the case of 0% interest intro cards, though that is assuming you are able to repay the bill before your introductory period ends.
Other ways to finance a new car
You don’t have to use a credit card to buy a car. In fact, you have plenty of other options. Let’s take a look at them now.
Take out a car loan
One of the most common ways to finance a car is with an auto loan. Auto loans tend to have lower interest rates than credit cards, and many financiers are willing to work with bad credit borrowers.
Make use of a co-signer
If you’re worried about your interest rate or if you will even qualify for a loan in the first place, a co-signer can help. A family member or a friend of yours who has good credit themselves could improve your approval odds and even lower your rate.
Wait to save up
Waiting to save up is not the fastest nor the most exciting option, but there’s nothing wrong with saving up for your next car over time. If you can save $200 per month, you’ll be able to save $2,400 per year!
Pay with cash
If you already have cash on hand, you might be able to buy a car now. However, depending on the amount of money in your savings account, you might not have enough to buy the car of your dreams. Still, if all you need to do is go from Point A to Point B, a car is a car.
Trade in your current car
If you already own a car, trading in your current ride for a newer model can be a substitute for your down payment because the trade-in will likely lower the total cost of buying a new car. Alternatively, you can try to sell your car for potentially more than the value of a trade-in and use that cash as a down payment instead.
You can buy a car with a credit card but you probably shouldn’t
Buying a car with a credit card comes with a long list of pros and cons. While it’s certainly possible to do this, you’ll likely face restrictions, such as credit limits and dealer policies. Plus, with credit card interest rates as high as they are, the downsides often outweigh the perks.
FAQ
How much can you put on a credit card when buying a car?
Many dealers limit credit card transactions to a range of $5,000 to $10,000. However, some don’t take credit cards at all, whereas others are willing to charge as much as your credit limit allows.
What is a normal down payment on a car?
The definition of normal will vary, though Kelley Blue Book recommends putting at least 10% to 20% down when it comes to cars. Alternatively, Progressive recommends putting 20% down for a new car and 10% for a used vehicle to balance the loan value with the impact of depreciation.
Can you purchase a car with a debit card?
Yes, you can purchase a car with a debit card as long as the dealer’s policies allow for this. That said, many dealers restrict the use of a debit card due to potentially high transaction costs.
Anna Yen Anna Yen, CFA, has nearly 2 decades of experience in financial markets, primarily with JPMorgan and UBS. Currently, she manages digital assets and her goal at FamilyFI is to empower families with financial literacy. She’s worked in 5 countries and visited 57.
